Page Industries: the accidental beneficiary of low GST rates
The government’s decision to fix the goods and services tax (GST) rate for apparel priced below Rs1,000 at 5% has come as a shot in the arm for Page Industries Ltd. Volume growth had slowed in recent quarters and as earnings missed Street estimates, analysts began to question the stock’s expensive valuations.
But GST at 5% is expected to have a positive impact on Page Industries’ volume growth and market position. Currently the company is estimated to pay an indirect tax of around 7%. With most of its products priced below Rs1,000 per piece, product prices are expected to come down, aiding sales.
“Reduction in tax incidence from around 7-7.5% to 5% should aid Page’s volume growth as consumers find it easier to premiumize. Further, service tax credits, which were earlier not availed, may drive further price cuts,” IIFL Institutional Equities said in a note.
To be sure, Page Industries does not particularly operate in the entry-level segment. Its products are in the mid-premium segment. But ticket sizes are small.
According to Ambit Capital Pvt. Ltd, almost three-fourths of the company’s products are priced below Rs1,000 per piece. As the lower tax rate reduces the cost arbitrage between the organized and unorganized firms, companies like Page Industries are expected to gain competitive advantage. Currently a significant part of the market is controlled by the unorganized sector.
“Given the inherent low ticket size, aspiration for comfortable product and high brand loyalty, lower price differences can aid players such as Page Industries,” Ambit Capital said in a note.
These expectations are driving up the stock. It is up 14% in the last two weeks. IIFL raised its earnings estimates for the current and next fiscal years marginally. Strong volume growth supported by GST benefits is expected to support premium valuations.
While the commentary should cheer investors, there are doubts if the GST benefits are going to be as large as perceived. According to an analyst with a domestic broking firm, Page Industries can find it difficult to offset the 18% GST rate on synthetic fibre, which is used in its products. This can cap the cost benefits, points out the analyst.
The other question investors have to ponder is to what extent Page Industries can exploit the situation.
Competition in the entry-level segment can be fierce. Also it is not yet clear how the unorganized firms will react to the new tax structure.
While analysts expect clarity to emerge in the next two-three months, much depends on the transformation of the market from the unorganized to the organized sector.